What is accrual accounting?

By Book Keeping Pros
Sources checked 15 Oct 2026

Definition

Accrual accounting records income when it is earned and expenses when they are incurred, rather than when money changes hands. Invoice and payment dates can fall in a different period. Because income and expenses can be recorded before they are paid, the books also show money owed to and by the business.

Because it puts income and expenses in the period they belong to, accrual accounting gives a truer picture of profit for a month or a year. It is also what accounts payable and accounts receivable rely on. Costs tend to land in the same period as the sales they helped earn, so a job's materials and labour usually sit beside its income and the report shows whether that work made money.

It takes more work than cash accounting, because every unpaid invoice and bill has to be tracked until it is settled. In return, the books themselves hold the aged lists of who owes the business and whom it owes, so no separate spreadsheet has to be kept in step. Month-end work also grows, because amounts with no invoice or bill behind them yet still need to be brought in.

Those month-end adjustments are what make accrual figures complete. A cost paid in advance, such as an annual software licence, is shared out over the months it relates to rather than charged to one. A service already used but not yet billed is recorded as a cost in the month it was used, and work finished but not yet invoiced can be recorded as income for the period it was done. Adjustments like these are usually journal entries, and many are reversed at the start of the next period so the real bill or invoice can then be entered as normal.

In Australia

business.gov.au's guide to cash and accrual accounting says accrual accounting suits businesses that don't get paid straight away, such as architects who provide a service and invoice for it later, and that it shows your true financial position by including money owed to you and money you owe.

It also notes that accrual accounting is more complicated than cash accounting, so you need a good understanding of bookkeeping methods or a professional to help.

The guide's own example is a builder who finishes a project and sends the invoice: the sale goes into the books at that point, before any payment arrives. It adds that the method helps businesses that handle many contracts or large sums of money.

Worked example

Illustrative example: when one sale is recorded under each method
What happened	Accrual accounting	Cash accounting
Work completed and invoiced on 28 June, paid on 5 July	June	July
Goods received and billed by the supplier on 20 June, paid on 10 July	June	July

Illustrative example only: these rows show the method and are not sourced data.

Common mistakes

Recording a customer's payment as new income when the invoice was already recorded, which counts the sale twice.
Leaving supplier bills out of the books until they are paid, so the month's costs and the amount owed both look smaller than they are.
Expensing a year of insurance in the month it is paid when the books are meant to spread it over the months it covers, so that month's costs look higher than they are.
Forgetting to reverse a month-end accrual, so the cost is counted again when the real bill is entered.
Leaving old balances on the receivables list without following them up, so invoices that are unlikely to be paid still count as money owed to the business.

Common questions

What are the pros and cons of accrual accounting compared with cash accounting?

On the plus side, accrual accounting matches income and costs to the period they relate to, shows the amounts customers owe and the bills still to be paid, and gives profit figures that are easier to compare from month to month. On the minus side, it needs more bookkeeping: unpaid items have to be tracked, payments matched and period-end adjustments made. A month can also show a healthy profit while the bank balance is low, because some of that income has not been collected yet.

What is the difference between accrued expenses and accounts payable?

Both are amounts the business owes, but they differ in the paperwork behind them. Accounts payable holds bills the business has received and not yet paid. An accrued expense is a cost already incurred where no bill has arrived, such as a contractor's hours worked in the last week of June that will be invoiced in July. It is recorded with an adjusting journal at period end, then cleared once the actual bill is entered.

Is accrued revenue the same as accounts receivable?

Not quite. Accounts receivable is money owed on invoices the business has already sent. Accrued revenue is income earned for work done or goods supplied that has not been invoiced yet, such as the first half of a two-month job that is billed only at the end. Both are assets on the balance sheet, and accrued revenue moves into receivables once the invoice goes out.

Related terms

Related service

Small business bookkeeping

Your books kept current, every month.

More about small business bookkeeping

Sources

Choose between cash and accrual accounting
business.gov.au, Australian Government. Current at 15 October 2026, released 13 September 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.